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In defense of airlines’ checked baggage fees

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A White House National Economic Council report on “hidden fees” issued in late December describes airlines’ checked baggage fees as “de facto mandatory” and operating in a transparency “gray zone” in which the fees are optional only in a “theoretical sense.” This is the latest salvo fired at airlines’ checked baggage fees since US airlines generally started imposing them in 2008. But the complaints about checked baggage fees are largely misguided. Those wanting them rescinded are inadvertently advocating for worse customer service for passengers and pushing airlines to adopt a policy that would likely make the carriers poorer performers both operationally and financially.

A decade ago, I wrote an ATW cover feature titled “Baggage Blues” that looked at airlines’ sorry baggage-handling situation at the time and explored whether carriers should start charging fees for checked bags. I reread that feature this morning, and it’s important to remember the state of affairs in 2007—before baggage fees became a way of life in the airline business. For starters, the global airline industry’s mishandled bag rate in 2007 was 18.88 per 1,000 passengers, an all-time worst performance, according to SITA. And a big airline industry story that year was carriers getting caught flatfooted by large volumes of stranded checked bags—particularly during severe weather—that in some cases took weeks to return to passengers.

Doing the reporting for the feature, I was surprised to learn that airlines historically had not figured out how many bags they were routinely handling and exactly how much transporting checked bags cost. Given that passengers could check bags for free, this led to an untenable situation that was costing airlines dearly in 2007, both in terms of operating performance and pure costs (the more bags, and the more they weigh, the more it costs to fly them): Airlines had no idea, flight to flight, what the baggage situation would be. It was not that different than if, say, airlines had been selling flight tickets to a family rather than an individual passenger and then waiting until the day of the flight to see whether they would be transporting a family of two or five.

This was a classic example of airlines being stuck with a really bad way of doing something because it was the way they had always done it.

So a lot of airlines ultimately decided to make a change and start charging checked baggage fees. Ultra-low cost carrier Spirit Airlines launched the trend in the US in 2007, following Norwegian Air Shuttle globally (which imposed a €3 fee for all checked bags in January 2007), and the flood gates opened when American Airlines imposed checked baggage fees in 2008. These fees have been widely derided, but here are seven reasons why they shouldn’t be:

1. Airlines’ baggage handling performance has improved dramatically over the last decade, in no small part because of the baggage fees, which bring a semblance of order and discipline to baggage handling and passenger packing. The mishandled bag rate per 1,000 passengers in 2015 was 6.53—down more than 65% compared to 2007.

2. Since the fees were imposed, airlines have gone from being perpetually unprofitable to being perpetually profitable, especially in the US market, where the fees have caused such consternation. The vastly improved financial performance is not because of the baggage fees alone. But the fees may be the best example of airlines acting like real businesses focused on covering their cost of operations, something the industry all too often did not do until the last few years.

3. It costs airlines to carry bags. Period. So if checked baggage fees were rescinded tomorrow, airfares would have to go up. Looked at this way, having baggage fees is actually more transparent than not having them. Sans fees, airlines would have to factor in the cost of carrying checked bags into base fares, and passengers wouldn’t know how much of their fare was taken up by baggage-carrying costs.

4. While the National Economic Council calls checked baggage fees “de facto mandatory,” this really isn’t the case. I travel routinely by air and almost never pay a checked baggage fee because, unless I’m going abroad for an extended period, I don’t check bags. If baggage fees were rescinded, passengers like me would be essentially paying for others’ checked baggage. If a passenger checking no bags and a passenger checking two large bags are paying about the same fare, then the passenger with no checked bags is subsidizing part of the other passenger’s cost of flying. How is that consumer friendly?

5. The biggest mistake airlines made on checked baggage fees was not imposing the fees decades earlier. Again, it costs money to transport weighty items by air (just ask FedEx and UPS). By not charging checked baggage fees, airlines led passengers to believe that bringing all sorts of baggage along was part of the service. Actually, passengers were getting a “free” service they finally started getting charged for—or at least having the charge clearly delineated.

6. Airlines can make their own decisions regarding baggage fees (whether to have them, how much they should be, etc.) and passengers can respond accordingly. Southwest Airlines continues not to charge for checked bags. That’s the airline’s decision in a free market. Though the airline has gotten knocked by some Wall Street analysts for not charging a checked baggage fee, Southwest CEO Gary Kelly maintains that not having the fee is a product differentiator that generates more revenue than the fee would bring in. (Former Spirit CEO Ben Baldanza was fond of saying that Southwest does indeed charge for bags; the “fee” is just included in the base fare). Airlines can win or lose business based on their baggage fee policy—it is one of many factors passengers can and do consider when choosing airlines.

7. According to US Department of Transportation statistics, the average total domestic roundtrip airfare, including checked baggage fees, dropped each of the last two years and was 6.8% lower in 2016 compared to 2014. In fact, adjusted for inflation, the average total roundtrip domestic airfare, again including baggage fees, was 11.5% lower in 2015 compared to 2000. Baggage fees are not driving up the cost of flying for airline passengers. If the fees went away, base fares would almost certainly rise. So if checked baggage fees were eliminated, passengers would likely get little-to-no cost benefit and pay the price in terms of worse customer service and poorer airline operating performance.

Ah, you say, but what about carry-on bags? Isn’t United Airlines now charging for carry-on bags? (No, that’s not true, actually.) Stay tuned: In an upcoming post, I’ll address United’s new basic economy fare (which doesn’t allow passengers paying the fare to bring carry-on bags) and the unfair criticism the airline has received... 

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